It’s Not Easy Being The Bank Of Mum And Dad
When planning to help the kids into a property it pays to get a legal, accounting and tax perspective on all your options, writes Mark Withers.
2 September 2023
Many parents will relate to navigating the minefield around helping children into a home.
Firstly, there is the pressure to do so given that it has become increasingly difficult for young people to qualify for lending without assistance. While a dip in house prices has helped some, the increase in interest rates and the stress testing applied by banks under the responsible lending code has meant it is as difficult as ever for the kids to actually get a loan to buy their first home.
Couple that with the pressure to do for every child what you have done for one, and you can be up against hurdles that make planning for your own retirement difficult to achieve.
One dilemma with helping the kids is the question of what structure is the best way to actually achieve it.
It’s really important to think through the impact that providing this assistance will have on you, and to work that out relative to all the kids and what you can really afford to do.
Backing out of these arrangements once in can be very difficult if doing so means the kids can’t afford to retain the home.
Going On The Title
Some folk have traditionally opted to go on the title of the property and look to have the kids take ownership down the line as they can afford it.
The problem with this is that the kids don’t technically own the property and responsibility for the mortgage rests with mum and dad as landowner.
The kids then feel obligated to remain in the property that was purchased for them but can become resentful if there is no clear pathway to actual ownership.
Add to that the problems associated with bright-line, and you are really swimming in soup. The kids can’t get a main home exemption from bright-line unless they are the actual owner of the property and are living in it.
Even if the property is purchased by your family trust, and the children, as beneficiaries, reside in the property, there is no main home exemption. The main home exemption from bright-line is only available if the trust’s principal settlor is living in the home or if the principal settlor does not have a main home, which is most unlikely.
Because of this, I have personally always favoured the option of parents allowing the child to actually go on the title of the property, then the parents simply become the “bank” and lend them the money the bank won’t to make settlement.
This gives the kids the incentive to work hard and profit from adding value to the home without mum and dad having an ongoing ownership interest.
Ideally, parents will require the kids to get a mortgage of their own that is as large as it can be without the need for parents to guarantee it. This way, the parents can isolate their own risk based on their own ability to raise the funds needed to bridge the gap for the kids without actually becoming liable for the kids’ mortgage debt.
Having decided to lend the kids money, the next question is whether to charge the kids interest.
Often the decision is “no”, simply because the kids don’t have the income to pay interest to the bank for the mortgage and mum and dad for their loan. But in some families the kids are called on to make interest payments, especially if mum and dad have themselves had to borrow the funds or the kids have high enough incomes to service it, but a low deposit.
Now some alert readers will already be wondering what the tax position is on interest earned from the loan to the kids. The interest income is certainly taxable to the parents. In most cases this will be on a cash receipt basis rather than accrual.
In most lending situations there is a requirement on the payer to deduct resident withholding tax from the interest payments if the annual interest bill exceeds $5,000.
However, thankfully in the case of the bank of mum and dad, there is no requirement for RWT to be deducted by the kids. This is a result of section RE 4(3) which says that RWT is only a requirement when the payer is involved in a “taxable activity”.
Where the loan to the children is to fund their own domestic home purchase no taxable activity exists, and so there is no RWT withholding obligation. While the interest paid will still be taxable income to the parents, the need to register for RWT and administer this system is thankfully avoided.
If you're planning to help the kids into property, get a legal, accounting and tax perspective on the options and work through these to determine what is right for your own family circumstances.
Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. PKF Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz